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Devolution could create city inequality if business rates are not reformed

The government must make changes to the business rates system if the UK is to push forward with devolution plans.

The current system would reinforce economic disparity between cities rather than allow struggling areas to reinvent themselves, argued the Centre for Cities think tank.

In a briefing released today, the organisation has warned about problems caused to certain cities because less productive areas will be encouraged to accept low-quality and often out-of-town businesses to keep up with rates.

At the moment, the system rewards areas only for increasing the quantity of their floor space rather than the quality. For more productive cities where there is already high demand for commercial space, this gives incentives to develop the additional commercial space they need to grow their economies.

However, for cities with lower demand for commercial space the current system will encourage the development of low-skilled industry just to increase the floor space.

“Devolving business rates could be a hugely significant step towards giving cities more of the powers, resources and incentives they need to tackle the economic challenges they face,” explained Andrew Carter, chief executive of Centre for Cities.

“But for that to happen, the government needs to make the current system more inclusive and responsive to the needs of struggling places – otherwise devolution will entrench economic disparities across the country.

“That means giving places more incentives to improve their commercial property, as well as making more business space available. Not only will that reward places for taking the right steps to attract more high value firms and jobs, it will also help generate more business rates revenue overall – some of which can be redistributed to places which are struggling.”

Carter suggested the government should look to hand land and property taxes over to cities in the future, in order to give them a sustainable financial footing.

The think tank has also recommended that the government allow cities to capture commercial properties value uplift, as well as simplifying the system to make it more efficient and responsive by either increasing the frequency of revaluations or removing the cap on the total yield generated.

The government announced a number of new devolution deals over the last year. Most recently a North of Tyne agreement was put forward in the Budget, replacing the original north east plans, and the West Midlands is set to sign a second deal.

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